If you are confused about how to prepare for a likely recession, Paul McClatchy, vice president of financial planning at wealth-planning technology firm eMoney Advisor, has these five tips to offer:
Regardless of what the market does, everyone needs an emergency fund.
If you don't already have one, set one up with enough money in it that could tide you over for at least three months in case you lose your job, become disabled or have an unexpected urgent expense. If there is only one income earner in your family, you would be wise to stash enough to last you at least six months. Carefully review your budget and see what can be cut if need be.
Invest in blue-chip and defensive stock funds.
If we do hit a recession, the latter may be the best to invest in. Large fund companies offer plenty of choices: Look for large-cap or income-producing funds, which are the most likely to contain stocks that will weather a downturn relatively well. Some firms with defensive stock funds require a minimum investment that can range anywhere from $50 to $3,000. Shop around for those that suit your needs.
Try to get any debt you may have off the books right away.
Credit cards aren't evil, but can become nasty when balances build. Now is a good time to practice restraint. The sad thing with a lot of consumers is that when January rolls around, they drag credit not only from this holiday season, but from the one before it too. Note to credit junkies: if something takes you longer than six months to pay off, maybe you shouldn't have bought it in the first place.
If you are approaching or are in retirement, consider seeking a financial adviser to recheck your financial plan and get your asset allocation in line.
Typically, the older you get, the less rebound time you will have following any downturn. If you are 75 years old, no adviser would say "let's put you a little bit more into stocks," but you may need or want to look into finding an additional source of income, such as a part-time job.
Remember that the best time to jump into the market is when it plunges
. People always look for sales, but for some reason when it comes to stocks they only buy when it surges. If there's any advantage to having a recession, it is that big companies go down in price. That's the time to buy, especially blue-chip stocks.
By Marshall Loeb